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A popular Wendy's commercial in the 80s made famous the question: "Where's the beef?" Good one. And here's an even better one: "Where's the alpha?" You might want to whip this one out the next time you meet with your portfolio manager.
Alpha is the over-and-above-the-expected return. It is the "value added." Therefore, it makes sense that a positive alpha means an investment has outperformed its market-predicted return, while a negative alpha would mean just the opposite. The expected return is calculated by a formula that takes into account the investment's level of unavoidable risk (aka beta).
Ever stepped into an elevator and after the doors close you become aware of an almost-suffocating scent coming from the woman next to you who must have bathed in perfume? Well, as you know, once the doors close you can't escape the smell until the ride is over. This is similar to beta, which is risk that can't be reduced or diversified away. A measure of "systematic" or market related risk, beta is used as a measure relative to a certain index -- such as the S&P 500.
So, for example, let¿s say your portfolio is managed to compete against the S&P 500. If you generate a better return than the index while not taking on added risk (standard deviation of returns) then you get alpha. Low beta means the market-related risk is low and vice versa for high beta.
Another example, let's say a mutual fund or stock has a beta of 1.5 relative to the S&
P500 ¿ that means it is 1.5 times as risky. So, over time, if the S&P 500 goes up 1%, your portfolio should be up 1.5%
plus (one can hope) some percentage of alpha. If the S&P 500 is down 1%, your portfolio should be down 1.5%.
Alpha
and beta are based off of linear regression of a set of data. Warning: this may cause a high school fifth-period flashback,
but it will be over before you know it:
The equation for a line is Y = a + bX.
a = alpha (the Y intercept - the added
value)
b = Beta (the coefficient you multiply X by)
X = S&P 500 (in this case)
Y = your portfolio
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Friday, May 16, 2008
White House Forced to Cap Oil Reserve; Should Embolden Congress to Push for More to Drop Energy Prices
Comtex
SANTA MONICA, Calif., May 16, 2008 /PRNewswire-USNewswire via COMTEX News Network/ ----Consumer Watchdog Calls for Sales from Reserve, Warning to Refineries, Swift Action on Oil Trading Curbs
The Energy Department's announcement that it will cap taxpayer-funded additions to the federal Strategic Oil Reserve is a small first step, and a late one, said Consumer Watchdog. Even so, it is a symbolic move that could drop gasoline prices by several cents this summer.
President Bush, in an abrupt about-face, was forced to act by Congressional votes to cap purchases for the reserve, and by oil prices that leaped today above $127 a barrel.
Even with this first step, motorists nationwide are likely headed toward $4.00 a gallon gasoline nationwide this summer, said Consumer Watchdog. If refineries continue on a path of cutting back production to increase gasoline prices, any effect from capping the reserve would be canceled out at the pump.
"Both parties in Congress were forced to hear drivers' anger at both unaffordable pump prices and the 'oil tax' that consumers are paying on everything from groceries to air travel," said Judy Dugan, research director of Consumer Watchdog. "Now Congress has forced the White House to listen, too. Capping the reserve will signal at least awareness of the magnitude of the economic problems caused by oil and fuel prices."
It will also save taxpayers at least $90 million over six months, given the program's $187 million budget for this year, said Consumer Watchdog. The actual savings would probably be much larger, given that the budget was decided long before the rise to even $100 a barrel oil.
The effectiveness of this first belated move will depend on whether government keeps pushing to get speculative markets under control and prevent refinery profits from eating up any savings from lower oil prices, said Consumer Watchdog.
"At a minimum, the White House should also state its willingness to "loan" some of the reserve into the market as it did after Hurricane Katrina, which effectively dampened oil prices," said Dugan. "Congress and the White House must also put newly enacted regulation of speculative trading on a fast track, and hire the financial cops to detect manipulation."
Consumer Watchdog is California's leading non-profit and non-partisan consumer policy advocacy group.
For more information visit us on the web at: www.ConsumerWatchdog.org and www.oilwatchdog.org.
SOURCE Consumer Watchdog
http://http://www.oilwatchdog.org
Copyright (C) 2008 PR Newswire. All rights reserved
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